Posts Tagged ‘value-added tax’

We hear that corporate tax rates, at 35% (federal), are too high and need to be reduced so U S companies can be competitive. I remain confident that the best way to fund public services is thru a tax on land value and other measures of privilege, but if any kind of corporate tax is to be retained, here are a few things to consider:

The statutory rate is 35%, but there are all kinds of credits and deductions a corporation can take, so typically the effective rate is much less. Here’s a U S Treasury report (pdf) claiming that effective corporate tax rates were 20% in 2011, the most recent year calculated. Major corporations have the ability to obtain special tax favors. (Just scan thru the tax code (big pdf) to find some of these special favors, available only to individual projects or corporations which reached specific milestones on specific combinations of dates.)

Enterprises in most countries, but not in the United States, have to pay a national value-added or sales tax. The rate and details of course varies by country, but is typically about 19% as indicated by this OECD spreadsheet. Scroll down to the second half of this article to get some more perspective from John Hussman.

Most U S states impose an additional corporate income tax, with varying rates and rules. Illinois takes 9.5%. I have no knowledge about other states nor subnational jurisdications outside the US. However, this table from Deloitte (pdf) provides some detail, including an assertion that the total national+local corporate tax rate in Germany is about 30-33%.

Some commentators complain about “double taxation” of corporate earnings, because corporate dividends are paid out of after-tax earnings. However, incorporation, with its perpetual life and limitation of liability, is a privilege, for which it’s reasonable to expect corporations to pay. I don’t suppose that taxable income is the best measure of the value of this privilege, perhaps a small percentage of total expenditures would be better, but certainly the appropriate fee is greater than zero. Furthermore, a considerable percentage of corporate stock is owned by various kinds of entities which do not pay tax, such as universities and other nonprofits, and Roth IRA’s.

A Fine Mess by T R Reid. The subtitle is: A Global Quest for a Simpler, Fairer, and More Efficient Tax System. A great quest, and certainly something to investigate. Grabbed it off the library shelf, started to read, and …

Any time I see what might be a thoughtful book about taxes, I pretty soon turn to the index to see what it says about Henry George, land values, or economic rent. Hey, Reid devotes about six of his 262 pages to a section about Henry George and land value tax (tho he sort of conflates this to the “property tax” which includes improvements.) He acknowledges George’s historic significance and the logic of the Georgist argument. Then he says:

In George’s day, government– and thus the funding needed to pay for it– was vastly smaller than what we know today… [I]n 1879 there was no Social Security, no Medicaid, no NASA, no Department of Transportation or Energy or Health & Human Services. Some economic historians argue that the Georgian Single Tax might have been adequate to maintain the relatively minimal governmental establishment of the 1880s…No country has ever been able to fund its governments with only the Single Tax on the value of land that Henry George envisioned.

He does not say “Full collection of economic rent would be insufficient to fund all the legitimate functions of government,” tho he certainly implies it. So a response is needed. And available.

If the government provides services which make the community (city, state, country, whatever unit) a more pleasant or productive place, what is the effect on the value of land? Does this not apply to the services Reid mentions? If it does not, why should the people continue to pay taxes for such services?

If all the taxes which make labor expensive and real wages low, such as the tax on earned income, payroll tax, sales tax, tax on houses, utility tax, Medicare tax, were abolished, what would be the effect on the value of land? And what would be the effect on the need for that part of government expenditures which assist the poor?

In fact, how has the value of land in America changed since George’s time? It is a national embarrassment that we do not have reliable information to address this question, but surely the answer is “multiplied manyfold.” One reasonable estimate (pdf) of today’s value is $23 trillion (as of 2009). That’s more than the national debt. Because land value is a function of rent, and because all taxes come out of rent, imagine how much greater land value would be in the absence of all the anti-productivity taxes as noted above.

Of course, George’s proposed tax does not apply only to land as conventionally defined. It also includes taxes on mineral rights and extraction, electromagnetic spectrum, water rights, and more. (Mason Gaffney compiled a pretty complete outline (pdf)) It also applies to the moon and planets, should NASA or some billionaire claim rights.

So since Reid neglects to properly evaluate the potential of the single tax, I’m not inclined to read his book because I wouldn’t know what other oversights it might contain. But I did browse thru it. Reid really likes the value-added tax: “We should…implement this tax and use the money it raises to cut taxes on work and savings. (page 255)”

Uh, what are the economic purposes of work and savings? Yeah, to buy goods and services, now or in the future. Substituting a VAT for taxes on earned income would permit people to get earn or save more dollars — and would make more expensive the things people want to spend those dollars on.